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Boeing Wins!

GAO to Air Force: Bad dog!

Six months shy of the usual gifting season, and one day ahead of schedule, the U.S. Government Accountability Office (GAO) issued its long-awaited ruling on the aerospace giant's protest of a $40 billion initial contract awarded to rivals Northrop Grumman(NYSE:NOC) and EADS.

The upshot: Boeing won. The U.S. Air Force will have to reopen bidding on its mammoth KC-X Tanker Program. Now Northop and its team, which includes GE(NYSE:GE) and Honeywell(NYSE:HON) in addition to EADS, have a chance to put the controversy to rest and confirm its win. Meanwhile, Boeing and partners Rockwell Collins(NYSE:COL) and United Technologies(NYSE:UTC) get one last shot at proving their KC-767AT tanker is superior to Northrop's KC-30. But that's just the news. The story behind the news is actually much simpler: Boeing won the protest, and now it's going to win the contract.

Here's why.

Just the facts, ma'amAfter three months of consideration, the GAO issued a 69-page decision on Wednesday. To protect the commercial secrets of the rival bidders, the GAO asked them which facts contained in the decision they would rather not have made public. Until they do so, we must work from a three-page summary, the highlights of which read as follows, with a few paraphrasings for brevity's sake:

"Our decision [does not address] the merits of the firms' respective aircraft. Judgments about which offeror will most successfully meet governmental needs are [the Air Force's decision to make]. ... Our bid protest process examines whether" the Air Force rendered its decision fairly the first time around.

"The Air Force ... made a number of significant errors that could have affected the outcome of what was a close competition between Boeing and Northrop Grumman. We therefore sustained Boeing's protest."

Specifically, "the Air Force ... did not assess the relative merits of the proposals in accordance with the evaluation criteria identified in the solicitation."

"The Air Force conducted misleading and unequal discussions with Boeing," while favoring Northrop with private consultations on certain elements of its proposal.

"[The Air Force] made a number of errors in evaluation that, when corrected, result in Boeing displacing Northrop Grumman as the offeror with the lowest most probable life cycle cost."

So to recap, the Air Force apparently ignored its own rules for evaluating bids, let Northrop read from the "teacher's manual," and -- most important to taxpaying you-and-me -- chose Northrop's more expensive plane over Boeing's cheaper offering.

Damage assessmentBased on these findings, the GAO recommended that the Air Force "reopen discussions with the offerors, obtain revised proposals ... and make a new ... decision." It gave the Air Force 60 days to think this over.

GAO to Air Force: Bad dog!Within less than 24 hours, the Air Force came slinking back to the GAO, chastened and promising to be good. Whimpering like a puppy caught shredding Daddy's morning newspaper, an Air Force spokesman simpered appreciation for "the GAO's professionalism and thoroughness in its assessment of the protest of the KC-45A source selection" and promised to "do everything we can to rapidly move forward."

Translation: "Sir! Yes, sir!"Vanilla on its face, the Air Force's promise plus the GAO's recommendations tell us that this contract is moving back to square one. Boeing dodged a surface-to-air missile here. It nearly lost a $40 billion initial contract, and perhaps even more over the course of building the full tanker fleet, and it further warned that if it did not ultimately win, it may have to pull out of bidding on air tanker contracts internationally. I put the chances of Boeing risking another failure at somewhere between slim and none.

And I lean toward "none," because all of the reasons I initially laid out in Boeing's favor are now back in play:

The strong euro/weak dollar dichotomy that makes Northrop partner EADS' products so price-uncompetitive with U.S. aircraft. (This was, after all, the likely reason that EADS pulled out of a contest against Lockheed Martin(NYSE:LMT) for a Nordic fighter-jet contract last year.)

The smaller size of the Boeing plane, which may or may not make it more fuel-efficient than Northrop's offering and certainly makes its offering more flexible.

And there are two more reasons:

Initially begun in 2001, after President Bush's first term was safely under way, the debate over choosing a new air tanker now looks to be waged in the middle of a presidential campaign. Pressure to buy American in late 2008 will be intense, verging on insuperable.

Boeing has just survived a near-death experience. It won't risk losing twice.

Foolish takeawayThe Air Force may have to go through the motions of making a redecision over the next few months, but the result will likely be a Boeing win.

Author

I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.